2004
Banks fail to budget for full cost of Basel 2 - latest findings from global survey of risk management in banking
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13 April 2004
PA Consulting Group's survey finds 81% of banks have clear Basel objectives but only 39% have allocated budget to meet these plans
While the majority of banks (81%) are clear about how they will approach Basel 2, less than half (39%) have allocated budget to meet these plans, according to new research by PA Consulting Group. The research, 'Risk-based management in the banking sector', benchmarks how banks worldwide are measuring and managing risk, what they are planning to do and what benefits they have gained - particularly as they prepare for the new Basel Capital Accord, currently scheduled to go live in 2007.
The key finding is that while banks now recognise the need for risk management, for most, there is still a long way to go, particularly in how they manage and measure operational risk and, to a lesser extent, credit risk.
Eddie Niestat, a Member of PA's Management Group and head of enterprise wide risk management at PA, comments:
"Banks are facing a raft of issues and opportunities, as well as some major practical constraints that are preventing them from addressing these issues as fast as they would like. Since our last survey in 2001, most banks have made significant progress in improving both their measurement and management of market, credit and operational risk but most have some way to go if they are to reap business benefits from their investment."
The research found overall that banks' use of operational risk tools is much less well developed than their use of market and credit risk tools. This is an area of particular concern given the short lead times for implementing some parts of the Basel programme, such as the collection of operational risk loss data. For example, while 61% of banks have at least partially implemented collection of operational risk data, only 26% have any statistical models that enable them to analyse this loss data. In addition, only 24% are using their operational risk tools to allocate economic capital.
While many banks have basic credit risk management tools in place, some do not. For example, 60% have no tools for behavioural scoring and 67% have no tools for demographic scoring. This means that a substantial number of banks are failing to carry out basic creditworthiness checks on their borrowers and represents a major gap in their risk management tool-kits.
Most worrying of all, is that many banks have not integrated their credit risk tools into their decision-making processes. For example, while 69% of banks price transactions using credit risk information, only 41% use the same information to structure transactions. Despite possessing a reasonably large amount of credit risk data, 61% of banks are failing to use it to allocate capital across business units.
Eddie Niestat concludes:
"In the short term, banks should be focusing on more fully integrating their existing risk management tools into their decision-making. Longer term, they will need to develop new risk management tools if they are to derive further economic and competitive benefits."
These findings are explained fully in PA's survey report, Risk-based management in the banking sector, which also examines the practical issues involved in implementing risk-based management.
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Notes to editors
Press copies
Press copies of the report 'Risk-based management in the banking sector' are available from Linda Pearse on 01763 267137.
Banking context
Following PA Consulting Group's survey in 2001 on Risk-Based Management in the Banking Sector, banks have continued to face pressure from regulators, shareholders and directors to improve their risk management practices. However, it has not been clear where banks should focus their efforts in meeting the challenges lying ahead of them.
PA undertook a global survey of the industry to understand what banks have done, what benefits they had gained from this activity, and what they were planning to do. This enabled PA to form a view of where the major gaps lie between the current state of banks' risk management and best practice, and subsequently to form a view on the roadmap for necessary development of risk management across the industry.
About the research
PA's survey was issued to banks around the world in Spring 2003. Responses were received from over 50 banks, ranging in size from regional banks with assets of $2 billion to world leaders with assets of over $500 billion. Ten percent of the top 200 banks worldwide responded. Geographically, the respondents ranged across all continents: North and South America, Europe, Africa, Asia, and Australia.
Key findings:
- 27% of banks in the survey have no Chief Risk Officer or equivalent. Within those banks with a CRO, almost half of CROs do not report directly to the CEO
- while 90% of banks understand their organisation's risk appetite, less than half have actually quantified it
- the majority attempt to find an acceptable balance between risk and return for credit and market risk (90% and 80% respectively). For operational risk this falls to 50%, with the remaining 50% looking to minimize this type of risk
- 81% have clear Basel objectives but only 39% have allocated budget to meet these plans
- only 33% have a single enterprise-wide risk report that consolidates all risk exposures from across all risk types and all lines of business
- As in the 2001 research, it is the banks that use their risk management tools in business decisions, rather than those that have the most sophisticated risk tools, that see the highest levels of total shareholder return over a five-year period.
About PA Consulting Group
PA: delivering value
PA Consulting Group is a leading management, systems and technology consulting firm. Operating worldwide in more than 35 countries, PA draws on the knowledge and experience of 3,000 people, whose skills span the initial generation of ideas, insights and solutions all the way through to detailed implementation.
PA focuses on creating benefits for clients rather than merely proposing them. Our work is founded on powerful insights into our clients' issues, and in the private sector in particular, on the need to deliver superior shareholder returns. We help accelerate business growth by developing innovative products for our clients and by the application of emerging technology. We deliver major transformation programmes, mobilize human resources, and manage complex IT and technically-challenging programmes.
PA's results-focused approach is founded on a unique commitment to excellence, value and independence:
- Excellence. We are committed to unremitting excellence and quality in every aspect of our work: in our relationships with our clients, in the client assignments we deliver, and in the people we recruit and develop, who enjoy exciting and rewarding careers at PA.
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